US Tax Accounting Rule Eases Oil Prices

by Leroy Baker, Tax-News.com, New York

16 November 2004

US accounting rules, which usually serve to boost oil prices at the year's end, are this year helping to dampen prices in the overheated energy markets by increasingly supply, according to Reuters.

Oil companies seek to lessen the amount of tax they pay by managing stock levels using the US 'last in first out' (LIFO) accounting method, which determines the amount of tax that is paid on the value of stocks held at the end of the year.

Usually, firms will seek to run down their stocks to lessen the impact of taxation, which at the same time can often have the effect of driving up prices on the futures market, as speculators anticipate supply shortages.

However, short term crude prices fall when refineries refrain from buying and the market becomes oversupplied. Traders have reportedly observed that prices for low-sulphur fuel have fallen sharply in recent weeks, with buyers governed by the LIFO rule reluctant to build up stocks.

"The impact is going to be more pronounced when there is a large price movement in either direction," one source told Reuters.

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